Health Savings Plans

On December 8, 2003, President George W. Bush signed into law a new legislation meant to radically change current trends in health care. This new legislation created Health Savings Accounts 1. Health Savings Accounts are this administration’s response to the growing number of Americans who cannot afford adequate health care coverage, or who are receiving substandard medical care. Still in initial stages of development, Health Savings Accounts promise to return the power of choice to the patient, and break the monopoly insurance companies have long held over health care choices.

Health Savings Plans as proposed by Washington today are essentially an IRA account for medical expenses2. Money put into a Health Savings Account is tax deductible for the self-employed, and recent changes to legislation have broadened the group of people who can also claim this money as tax deductible. Health Savings Accounts are considered a tax shelter. The owner of the account owns the money, and has control of where the money is invested. Freedom to choose where the money is invested allows the owner to control the rate at which his or her investment grows, and how risky the investments are. Money in the account that is not used in a fiscal year rolls over in the account – there is no deadline by which time to use the money an owner puts into a Health Savings Account.

Almost anyone can qualify for a Health Savings Account. Legislation requires that anyone who owns a Health Savings Account must also purchase high deductible health insurance. High deductible health insurance typically costs less per month than lower deductible policies. High deductible insurance coverage is necessary to cover more expensive or emergency medical treatments. Legislators argued that money saved when a consumer quit paying the higher prices of low deductible health insurance could then be invested in the Health Savings Account. The Health Savings account would pay for smaller medical bills, maintenance, prescriptions, etc.

It is necessary that owners of Health Savings Accounts not have low deductible insurance. Owners of Health Savings Account may still purchase auto, dental, and vision insurance. Individuals with chronic conditions may purchase additional insurance to cover treatment for that specific illness, but the policy must pay only a specific dollar amount. Congress has outlined a range of acceptable policy premiums that can be considered high deductible, and the size of family and income factor into the deductible limit. Congress has also outlined limits on the amount of money a person may invest in their account and claim as a tax deduction. This amount ranges from 65-75% of the premium on their high deductible health insurance.

There are several advantages to a Health Savings Account. With a Health Savings Account, owners no longer have to deal with insurance middle men. Health Savings Accounts are the “antithesis of the HMO” in that they do not limit or control medical choices at all. Owners are free to choose their doctor, their level of care, and where they are treated. For additional health care savings, owners can choose to select medical providers from a preferred provider network as designated by their high deductible insurance company. A Health Savings Account is designed for current use, and should be maintained through retirement.

Individuals interested in setting up a Health Savings Account should contact their bank or credit union. Any bank or credit union that the IRS has authorized and ensured to handle IRA account may also handle Health Savings Accounts. State laws determine specific details of account maintenance, such as if an account is guarded by a trustee or a custodian. These details are available at participating banks and credit unions, and should be thoroughly discussed before an individual opts to open a Health Savings Account. Current legislation does not allow for joint Health Savings Accounts, so each spouse would need a separate account, and accounts can be created for children.

President Bush said recently that he felt Health Savings Accounts would bring demand forces back into the health care market3. New legislation, proposed as recently as January of 2005, could create even greater opportunities for tax free investment in Health Savings Accounts. With legislative trends in their favor Health Savings Accounts offer hope to the 45 million uninsured Americans and will continue to be a force in the escalating war on rising health car costs.